Compliantly Engage Contractors in Serbia

Any business hiring in Serbia should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. While only a handful of disputes have ever reached Serbian courts, the popularity of being an independent contractor is increasing at pace and so employers must understand the issues at play.

In Serbia, an employee is defined by having a written employment agreement with an employer before they start work. This definition is provided under the 2005 Labor Law, which also sets employee rights. A written service agreement (or consultancy agreement) can be used to engage workers outside of traditional employment. Both parties have significant freedom to decide between themselves on the terms and conditions of any service agreement. Serbian law has not yet developed precise specifications for the terms of a service agreement.

Whether you are engaging with employees or independent contractors in Serbia, it is important to work with a partner like Worksuite to ensure you have an engagement framework that complies with Serbian law. Alternatively, Worksuite can automatically alert you when freelance talent must be engaged directly as payrolled employees, or contractors.

In Serbia, independent contractors are self-employed workers who operate outside of the traditional PAYE system. Most independent contractors formally register as entrepreneurs. They record and pay their own income tax and social security contributions (often using Serbia’s lump-sum taxation model) and file annual personal income tax returns.

As yet, there are no firm guidelines as to what constitutes a service agreement in Serbia. However, it is advisable to adopt some baseline criteria to ensure the agreement does not resemble an employment contract, such as avoiding terms like ‘salary’, ‘working time’ or ‘vacation’. This helps to avoid the risk of reclassification from independent contractor to employee.

1. Autonomy. A contractor should have the freedom to decide how and where the work is completed, with their only obligation to provide a final product by a specified deadline.
2. Fixed fees. The service agreement should not mention a salary or paying a monthly wage. Instead, jobs should be priced and invoiced individually.
3. Flexibility. An independent contractor should have the freedom to choose when the work is completed, as long as the agreed deadline is met.

Equipment. Wherever possible, a contractor should use their own equipment and premises to complete the work.

Independent contractors in Serbia work under one of two main categories: entrepreneur (sole trader) or limited company.

• Entrepreneur: Independent contractors registered as entrepreneurs with the Serbian Business Registers Agency are in effect operating as sole traders. This means they can quickly begin to accept work as an independent contractor. Entrepreneurs must file annual income tax returns and make social security contributions, although they can opt for  Serbia’s lump-sum taxation model.

• Limited company: For RSD 4,500, independent contractors can set up a company by incorporating it with Serbian Business Registers Agency. Limited companies must also file an annual corporation tax return.

There are two primary engagement models for working with independent contractors in Serbia:

A. Direct engagement of the independent contractor, either under their personal name (if they are registered as an entrepreneur) or under the company’s name (if operating as a limited company). Under these arrangements, the contractor agrees to provide a set service for a specified fee. They invoice the client when the work is complete and must legally receive a payment within 60 days (45 days if working for a public authority).

B. A contractor can also be hired through an umbrella company, which formally acts as the contractor’s employer. The client pays the umbrella company for the completed work, and the umbrella company deducts its fees and any necessary tax and social security deductions before paying the contractor.

In the vast majority of cases, independent contractors in Serbia are paid directly (without deductions) once they have completed their work and issued a relevant invoice. The fee is fixed in the agreed contract between the two parties. Invoices must legally be paid within 60 days.

Independent contractors hired on a direct engagement are not on a company’s payroll. Their fees are paid without any deductions at source towards tax or other benefits. In Serbia an independent contractor is entirely responsible for reporting and paying taxes, as well as making social security contributions.

For most independent contractors registered as entrepreneurs, income tax is paid at 10% and social security is paid at 37.8%. However, entrepreneurs can also register for Serbia’s lump-sum taxation model, which often delivers lower overall tax bills for the registered payees.